A brisk mid-winter walk through the streets of lower Manhattan eventually led me under the iconic Romanesque arch that stands at the center of Washington Square. To my left, a uniformly-pristine row of Federalist-era, brick-and-columned town houses, standing like monuments to another, more gentile time. Over the years, NYU’s bustling urban academic community has emerged nearby. I first met Professor Moses in a small office, stacked high with art auction catalogues, at the University’s Stern School of Business, close to the epicenter of campus.

My journey began with an invitation to travel to the city to learn more about the Mei-Moses® index, a cumulative, 13-year data set that has emerged as a reliable predictor for art portfolio development and investment planning strategies. Their objective in this project is to help prospective art buyers to move out of the purely emotional realm of ‘buy what you love’ into more objective criteria. Moses explains to me that, “the emotions that guide a purchase should not be discounted or dismissed, but to be aware that there is additional data available, before making a purchase at auction, that the potential buyer may want to factor in.” He point out that his Index is aimed at the following: fine arts magazine

Since 1999, Moses and his colleague at New York University’s Stern School of Business, Jianping Mei, now Professor of Finance at Cheung Kong Graduate School of Business, in Beijing, have been compiling data that allows them to track the long-term performance of fine art. Their goal: to correctly analyze financial returns available on the art market. “It is important to remember,” says Professor Moses, “that art prices are ‘wealth bound’—the viability of a deal hinges on the size of the offer. Our model tracks those offers over time for ‘repeat pairs’; that is, the same item coming to market again, even years or decades later.”

The Mei-Moses® indexes focus on mature artists whose works command prices from tens-of-thousands to millions of dollars at auction. They take the original purchase price at auction any place in the world and then the most recent sales price at Christie’s or Sotheby’s in New York and calculate an annual return for a single painting. This ‘repeat-pair’ method is key to their approach; i.e.- how an identifiable art work performs when it is brought to auction twice, with a minimum of one year lapse between sales. So, for example, a J.M.W. Turner view of Venice sold at auction at Christie’s in London on May 29, 1897, for $35,000 and then sold at Christies in New York in 2006 for $35.8 million—which yields about a 6 percent annual return for 109 years—an impressive return, in addition to the joy of ownership, for the generations who may have owned it during that period.

To date, Mei-Moses® (with recent help from the ‘European Fine Art Database’) has compiled 26,000 such repeat-sale pairs, adding approximately 2000 incremental pairs annually, from recent auction transaction, for their ever-expanding indexes. Professor Moses explains that their data is based exclusively on Sotheby’s and Christie’s auction results, given that they represent established, recognized artists. They have broken out the historical periods of art being bought and sold into five over-arching collecting categories: beginning with Old Masters/19th century; Impressionist/Modern, American before 1950. They later added Post-War/Contemporary and Latin American works, the result of more adequate data in these last two categories becoming available for the period, 1988-2009.

Where the rubber meets the road for the Mei-Moses Indexes is putting them to work in the competitive field of investment advisory and planning, exploring ways in which their indexes can influence buy-hold decisions, maximizing rate-of-return, while limiting down-side risk. Moses tells me that the auction market is the best setting to consider the investment potential for art, because of its ‘transparency’. “In an auction environment, buyer demand sets the value of a piece. The house or the seller may set a reserve, but, if it doesn’t sell, then it’s considered a non-revenue event, or marketplace failure. We only count successful transactions and, unlike a gallery, collection owner, or artist, setting a retail price that they believe the market will bear (‘non-transparency’), a successful auction sale is a true measure of value—a market-tested exercise in supply and demand. There are strong parallels to the stock market, here. If a stock is placed on the block for sale, with a limit order price, and it doesn’t sell, then it’s a non-event. Only when that stock sells at a price that reflects demand, does it become a financial event we can evaluate. For this reason (and others), the correlation between stocks, bonds and commodities becomes a powerful comparative tool for modeling the auction art market,” Moses says.

But, unlike stocks and bonds, works of art are one-of-a-kind and need to be looked at on that basis. The closest existing model that accounts for the heterogeneity, or unique features of a sale item, is real estate. Moses explains that, “a new apartment building may offer a hundred units for sale, but some are higher up, some low, some face the city skyline, others the parking lot, and so forth. In other words—not all units in the building are comparable. The other factor to consider is supply and demand; that is, how many buyers and sellers are in the market at any one time. We all know that markets, and therefore pricing, are influenced by ‘bust and boom’ periods. These features affect asking price and ultimately, sale and resale price. We believe that the only relevant way to track the viability of money spent in a situation like that is to develop an Index that accounts for the individuality of unique objects, like residential real estate and art. The commonality between the two is due to the infrequency of trading and differences in the characteristics of the objects that come to market, from period-to-period.”

Thus for art and real estate, an index based on average prices over a period of time may be more dependent on the mix of objects that come to market rather than changes in the underlying market itself. A database of repeat sales of the same object resolves this issue. Thus, the statistical methodology used to create the Mei-Moses® indexes is similar to that developed by Professors Case and Shiller for their residential real estate index, published by Standard and Poor’s.

As noted, to insure transparency (free-market pricing) for the Mei-Moses® indexes, only data from public auction results are collected. “We have looked at the New York art market, from Sotheby’s and Christie’s auction houses, starting our analysis with data from 1925, since that is the start date for the S&P 500 total return index, which we use for comparison purposes. For the five major art-collecting categories: Old Masters/19th century; Impressionist/Modern; American before 1950; Post-War/Contemporary and Latin American, we search the current sale catalogues for items that have sold. For those items which also have a listed prior-auction sale, we use our best research efforts to obtain the consummated prior sale price at any auction house, any place in the world and at any date. If the object has been held for at least a year and we have successfully found both the sale and purchase prices, including the relevant buyer’s premium, we include it in our database. Thus, we introduce no subjective sample selection bias.” Moses explains. “We start our current annual All Art index with data available from 1925. This index explains approximately 70% of the variability of a measure of the underlying returns of the objects on which it is based.”

The compiled information allows for the creation of annual indexes for each of these period-specific collecting categories, as well as the All Art index. The data also allows Mei-Moses to develop insights into the factors that drive returns for individual or groups of objects. They also use the indices to undertake asset allocation studies, including art, as well as making available a ‘mark to market’ art valuation service. In 2009 they introduced a new feature allowing for the comparison of returns across important and highly traded artists.

The average investor maintains a diversified portfolio of equities (stocks), bonds of various types, commodities such as gold and cash in ratios that reflect desired return in exchange for exposure to risk. These investment instruments are considered ‘liquid’, because they can readily be converted into currency. Real estate, art and other collectables are ‘illiquid’ because the conversion cycle to currency is slower and product performance (average price) tends to be dependent on the mix of objects (supply) that come to market at any given time, as well as demand at the time (examples: the downward pressure on existing housing prices, given the number of foreclosures on the market today; the upward pressure on selected artists’ auction prices during periods when their work is in demand). “We were curious to see what would happen if we included relatively illiquid assets in a comprehensive portfolio management strategy. Our modeling assumed that, along with stocks, etc., most sophisticated investors would also own real estate as part of a long-term asset acquisition program. With the inclusion of the S&P/Case-Shiller U.S. Residential Real Estate Index and the Mei-Moses® art indexes, we could now foresee a means to incorporate art, along with other asset classes into a typical portfolio. We regularly evaluate rate-of- return, risk and correlation among other assets, over many time periods and holding periods. This detailed analysis allows investment advisors to have the analytical tools to guide their clients with a reasoned strategy for buying art or expanding an existing collection,” Moses says.

The beauty and uniqueness of art as an asset class is that it offers the individual three distinct ways to reap the pleasure and excitement from ownership. The incomparable beauty and emotional appeal of art ownership is the first and most obvious one, especially when those works become part of one’s home or office setting. The second factor is the enjoyment most individuals derive from the process of seeking out and acquiring art. This includes, but is not limited to, knowledge acquisition, socialization with like-minded collectors and experts, the excitement of the chase, meeting artists and visiting studios, etc.

The third beauty of art is its longevity and financial performance. For more than three millennia art has always been an important part of our cultural heritage. The passage of time is a key component to the analysis performed by the Mei-Moses® index. For each index, art’s relative performance is based on the historical time period under consideration. For example over the last fifty years the Mei Moses® All Art Index (a summary of the five categories under examination) and the S&P 500 Total Return Stock Index have had approximately-equal compound annual returns. The art index has underperformed the equity index for the last 25 years. Over the last five and ten year periods, art has significantly outperformed equities. “However,” Professor Moses explains, “for almost all these time periods, art has higher volatility and lower liquidity than most other financial assets. Conversely, art has low correlation with other asset classes and thus may play a role in portfolio diversification.”

The paintings in the index aren’t all blockbusters. Moses estimates that the median size of recent transactions charted is about $200,000 or $300,000. As their most recent update shows, over the last 50 years, stocks (as represented by the S&P 500) returned 10.9 percent annually, while the art index returned 10.5 percent per annum. And in the five-to-ten years, art outperformed stocks. But not all art performs equally. In recent years, Old Masters haven’t done so well, while Post-War/Contemporary art before 1950 has been soaring—up 25.2 percent in the last year alone. And across categories, masterpieces tend to underperform lower-priced paintings by a substantial margin. Why? Like blue-chip stocks, well-known paintings by blue-chip artists are known quantities and offer safety and stability and their importance was well-known when they were previously purchased at auction. As with stocks, the greatest opportunity for growth in art values comes when investors suddenly focus their attention on a hot new sector or name. But Moses points out that it is not necessary to seek out the latest ‘hot artists’ in order to do well; the broader Mei-Moses® art indexes have historically generated returns that make them of interest in asset allocation.

As noted above, there are some obvious differences between Van Gogh canvases and Verizon shares, having to do with liquidity. Art is far less liquid than stocks: You can’t simply push a button and sell a Picasso tomorrow. And while you might assume that the fortunes of the art market are closely tied to the fortunes of the stock market, Moses found that fine art actually has a very low correlation with stocks and a negative correlation with bonds. “In some sense, it’s a good portfolio diversifier,” says Moses.

Like stocks, art is susceptible to fits of irrational exuberance. In 1990, Japanese executive Ryoei Saito capped off the Impressionist art bubble by paying an impressive $82.5 million for Vincent Van Gogh’s Portrait of Dr. Gachet. Between 1985 and 1990, the Mei-Moses® art index returned about 30 percent/ year—the same unsustainable rate at which the Nikkei grew in that period and at which the S&P 500 grew in the second half of the 1990s. Despite today’s huge prices, Moses notes, the mood surrounding the art market is nowhere near as exuberant as it was when Western Europe’s economic largess was flooding into Japanese corporate board rooms in the late ’80s.

Critical Issues: Professor Moses Responds

The Mei-Moses index methodology is not without potential shortcomings. Observers in the ‘art-as-asset’ world are quick to point out that the Mei-Moses indexes:

1) Do not account for private treaty sales, a small, but important part of the secondary sales art market. Response:“True, but since there is no sale or purchase price transparency who is to judge whether the information being provided is factual and not subject to selection bias (stressing winners over losers) by the reporting firm.”

2) Do not account for buyer and seller transaction costs in an auction house setting. Response:“True, but we started with the premise that we wanted to determine the return based on what willing buyers over time had paid for an object. Thus our return values are the upper estimate on net returns. In addition we should point out that we compare our results to those of the total return index for the S&P 500 where dividends are reinvested tax free and does not account for transaction cost which are diminemus now but were much more substantial years ago. Research has show that over long periods of time from 1/3 to ½ of the total return of the S&P 500 is provided by the reinvested dividends. However the round trip transaction cost of some 20-30% will substantially reduce short term holding period returns, making day trading all but impossible, but since the average holding period in our database is over twenty years our research shows that the average reduction caused by transaction cost reduces annual returns by less than one percent.”

3) The indexes don’t consider art that comes to market, but doesn’t sell. Response. “True, but no one knows if this causes negative returns or positive returns that were just not sufficient to induce the owner to part with the work. We also fail to capture the returns of works the currently sell but had not sold the previous time it was offered. These would tend to offset some of the supposed negative bias of the works that did not sell. We also cannot study works of art that are not subject to public transparency.”

4) That the implied returns of art ownership don’t adequately account for costs related to art ownership: insurance, storage, transport, conservation, and the like. Response: “True, but these costs for most collectors are deminimus. Insurance is less than ¼ of a percent in most residential settings. Most collectors store what they own on the walls of their own dwellings. These costs are also small compared to the management fee charged in many equity accounts.”

5) That the database doesn’t account for the pieces that fail to sell on the auction block and are quietly unloaded for a loss in private sales, similar to those works previously addressed in issue #3! Response:“Additionlly however, we also do not study works that were bought at auction many years ago and are then given to museums. These would tend to have high returns and tend to mitigate any of the downside of works that are dumped in private sales. Once again however we cannot study what is not knowable and where there is no price transparency and potential selection bias.”

6) That art is purely aesthetic and has no underlying value (like a stock’s corporate earnings) to insure performance over time and that art is subject to the whim of society’s taste-makers and therefore, is difficult to reliably evaluate, using standard metrics. Response:“Art is like gold which has very little underlying value and pays no dividend. Most of gold’s price is based on its supposed hedge against inflation or based on speculation. Our database of over 26,000 pairs over 150 years incorporates changes in style and whims over time since we have pairs that were part of every changing environment. Also for the last 3000 years there has always been, somewhere in the world, rich individuals who were exhibiting their wealth through the size of the domiciles and the art and furnishings that adorned it.”

In addition, Moses responds to all of these objections by pointing to his enormous data base. “26,000 repeat sale pairs cannot be considered an unrepresentative sample of what has gone on in the knowable part of the art market over the last 200 years. Not every stock that has a limit order on it, sells. In that case, my expectation as the seller is not satisfied. Why do we expect something different from the art market? We do not make the financial markets clear these limit orders at the end of the day; why should we force that on the art market? We eliminate selection bias by not just focusing on the high-priced ‘winners’ in the auction market, or the artistic superstars. By focusing on the ‘S & P’ of the art market, we capture performance data for 90% of the mature artists, whose work comes into the two major auction houses in the world and track their performance on a matched pair basis only. Not only are we comparing apples-to-apples, we are looking at the same apple, with a prior auction record, as it returns to the auction block after a minimum of one year in ownership hands. We eliminate quick turn-around, ‘day-traders’, where the owner is going for quick profit in an overheated market,” Moses emphasizes. “Our goal was to demonstrate that the broad auction market had sufficient financial performance as a whole, and did not require the collector’s ability to choose the outperformers to gain sufficient returns, to make art pay in a well-balanced, optimally-designed wealth portfolio.”

As a result, Mei-Moses® can look at long-term performance for art as a legitimate part of a diversified portfolio that are realistic and achievable in the market. “Over the years, with the usual ups and downs, art performs at an average 9% rate-of-return. Some indexes claim 12, 15 or even 18% rates of return, but we have found those models to be flawed,” he tells me. “We believe that the only place to achieve this kind of return is in an auction environment, where the informed buyer observes one simple rule: the best returns, on average, are achieved when you never buy a work of art for more than the index-inflated price from the last sale—never buy a work of art for more than the index inflated price from the last sale. Knowing your facts, keeping emotions in check and flying by this rule will maximize (knowing there is no guarantee of future performance) your chances of doing well in a leveled playing field.”

Over the last ten years, the risk—or down-side exposure—associated with the Mei Moses® All Art index is less than that of the S&P 500 total return index, 14.4% vs. 20.4% respectively, and 17.6% vs. 18.3% respectively, over the last 25 years. We think this was caused by art’s methodical rise since the late 1990s, after a pronounced downturn in the early 1990s and then another pronounced drop and recovery over the last three years. Contrast this with stocks meteoric rise of the late 1990s and a slow recovery after the 2000-2002 down-turn, followed by substantial increases for a brief period, until the dramatic decline of 2008, returned it to 1997 levels, followed by last year’s recovery and a continuation of solid gains in 2011.

However the downside risk for the equity index over the last 50 years, 17.2%, is slightly better than the art index, 17.8%. Over the past three years our results show that there has been a substantial reduction in the 50 year historic lower risk of equities over art (from a difference of 3-5% to the current 0.6%). The very low correlation factor between the art and stock/bond indexes for the last 50 and 25 years respectively indicated that art may play a positive role in investment portfolio diversification.

“We are confident about the strength of our model after so many years and with so many repeat-sales pairs (26,000, to date with 2000 more added/year),” Moses explains. “Buying art for love is a perfectly understandable motivation, but the question has to be asked, ‘How much is love costing you?’ Approaching the purchase experience objectively doesn’t have to diminish the emotional charge that comes from acquiring art. Understand the metrics and variables that will increase the likelihood that your investment will hold its own over time. Know that masterpieces are exciting to consider, but are likely to underperform for the vast majority of buyers, over time. Focus on the mid-range, mature artistic community; buy at auction; which is the only truly democratic way to evaluate pricing dynamics; know the limit of value for each piece you bid—don’t bid beyond the index-adjusted purchase price from the last sale of that work of art; recognize that there is a painting for every purse and just because you didn’t pay too much for a painting doesn’t mean it won’t yield either joy or return-on-investment in the long run.”

The Home page allows access to a selection of articles and interviews involving the Mei Moses® indexes and research results of Beautiful Asset Advisors®. Several thousand articles have appeared, using Mei-Moses® data since it first became available in 2001. A complete list can be found (enter “mei moses” as the preferred search object).

The Home page also allows access to reactions to Mei-Moses® index research and to the website from art, insurance and financial market participants. Also, frequently asked questions (FAQ’s), such as: Why only use auction information? Why use a repeat sale methodology? Dealing with works that do not sell at auction; developing the optimal collecting category; lists of representative artists from each collecting category are also provides, as well as contact information and bios for the principals.

Once on the useful Home Page of Mei-Moses®, Beautiful Asset Advisory, LLC, the website is organized into five additional sections:

The Market Insights section contains the annual updates of our analysis of the New York auction market covering returns, risk, and correlation performance for art, as compared to other assets. It will also contain tracking reports issued in early April, July and November of each year, describing the progress of the market within that current calendar year. Any special research reports that might be of interest to subscribers, such as the analysis of financial performance of Matisse and Picasso created some years ago, during their combined show in New York, or the current relationship among art, equities and real estate, can be found there.

The Index Data section contains graphs for the All Art Index since 1875. Graphs for the All Art Index, as well as most of the collecting category indexes for the last fifty years are also available (Old Masters/ 19th century; Impressionist/Modern; American before 1950; Post-War/ Contemporary and Latin American [most recently, data on the traditional Chinese art market has been added]). Graphs for indexes based on special studies will also be available such as the one we created based on our analysis of purchase price and performance.

The Asset Allocation Studies section analyzes the benefits of a diversified portfolio, including art. The risk-return tradeoffs of including art in a varied portfolio of stocks, bonds, cash and gold are illustrated. The section also visually demonstrates the optimal allocation percentages to these asset classes, at various return levels. Also demonstrated are optimal portfolio results for individuals with a fixed pre-existing art collection. The user gets to choose which art assets to include and which historical time period to use for historical performance.

The Art Valuation section allows the user to employ an applicable Mei Moses® art index and a user-designated prior-purchase price or appraisal value to create a personalized current “mark to market” valuation level, based on art market changes over the intervening time period. This methodology may be useful in creating art valuations for potential object sales or insurance valuations of existing works in a collection, or price estimates for proposed current purchases at auction or from a dealer. Individual subscribers will be entitled to an unlimited number of valuations, per year, for their own non-commercial, personal use. Daily restrictions may apply however based on total volume of traffic.

The Artist Returns section, new in 2009, provides information on the returns achieved at auction for the works of each of the 150 artist with the largest number of repeat auction sales represented in ‘repeat sale’ database. This is in the process of becoming the most comprehensive analysis of individual artist returns available anywhere. For each artist graphed, the compound annual return (CAR) of each repeat-sale pair, as a function of the year the work was purchased, is presented. Also provided are summary statistics on the mean and standard deviation of the CAR for all repeat-sale pairs, for works by these artists.

The CARs for individual artists are not comparable because the repeat sale pairs have different ownership dates and holding periods. To enable an appropriate comparison between and among artists, we normalize the returns for each artist’s works relative to the broader market. We calculate the excess return for each repeat sale pair as the difference between the CAR of that pair and the CAR for our all art index over the same holding period, and calculate the summary statistics (mean, standard deviation) of the excess returns for all the repeat sale pairs of each of the artists analyzed.

Recommendations to Portfolio Managers and Investors

Investment advisors, typically unacquainted with the complex forces at play in the art world tend to shy away from discussions with their clients on the topic of their present art holdings or the reality of factoring in art acquisition as an integral part of their portfolio and wealth-building strategy for the future. Approaching the topic of art as an integral part of a diversified portfolio means having the confidence to engage in a meaningful discussion of the financial ramifications of the art he/she currently holds or is thinking of buying, knowing that there are tools available to help guide the process.

Most high net worth clients will have some form of art as part of their holdings, along with other illiquid categories like real estate and other collectables (watches, cars, fine wines, etc.). Assisting the client to consider art as an important diversification strategy, by accounting for works of art currently owned, along with a proposed strategy for acquiring more art, while mitigating risk and building a realistic ROI, is an important way to strengthen the manager-client relationship. Mei-Moses® indexes provide a reliable and practical means to that end.

By Richard Friswell, Executive Editor

Jianping Mei, Ph.D. is a professor at the Cheung Kong Graduate School of Business in Beijing, China, and co-founder of Beautiful Asset Advisors®, LLC; previously he was an associate professor of finance at New York University’s Stern School of Business.

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Michael Moses, Ph.D. is a co-founder of Beautiful Asset Advisors®, LLC; previously he was an associate professor of management and operations management at Stern School of Business.

Editor’s note: This recent update appears on the Mei-Moses® Web site. Go to their helpful site for additional timely information:www.artasanasset.com. Readers may also want to request a free re-print of an article recently published inThe Journal of Investment Consulting, entitled, “Wealth Management for Collectors” (2010). Contact Mei-Moses at support@artasanasset.com.

The 2009 decrease in the return of the Mei Moses® All Art index of approximately 23.5 percent was the largest decline in the all art index since the 1991 decline of 38.7 percent. The latter decline occurred after the bursting of the art bubble of 1985-1990. The 23.5% was the second largest decline since the great depression. The declines of 2008 and 2009 occurred after five years of positive annual growth averaging almost 20 percent. The 2010 results, an increase of 16.6%, has stopped this slide and may be the start of a new base building period for the auction art market. These results have allowed the all art index to slightly outperform the results for the of the S&P 500 total return index (where dividends are reinvested tax free) of 15.06%. In addition the most recent ten and five year compound annual returns (CAR) for art, 4.86% and 3.59%, exceed the S&P returns of, 1.35% and 2.28% respectively. Stocks outperformed art over the last twenty five years with a CAR of 9.91 percent compared to 6.43 percent for art. However, for the last fifty years the returns were very close with art achieving a CAR of 9.23% compared to the 9.73% for equities.

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Additional Reading Material:

Mei, Jianping & Moses, Michael. Art as an Investment and the Underperformance of Masterpieces. The American Economic Review, pgs 1656-1668, 2002.

ARTES “fills a void”

"Thank you for calling my attention to ARTES. As I mentioned in my comments at Yale, the Internet needs more on-line publications that address the field of art with a comprehensive, in-depth treatment of the subject. ARTES fills that void. I will continue to read the magazine and wish you well in your efforts to bring this much needed resource to a broader audience."
~Holland Cotter, Pulitzer Prize-winning art critic, 'New York Times'